Demographic 'sweet spot' could turn sour

Socioeconomic Planning Secretary Arsenio Balisacan. File Photo

THE “demographic sweet spot” has been a favorite talking point of economic wonks in the Philippines for the past several years, as it is seen as one of the country’s strongest competitive advantages and a strong driver of economic growth.

However, some recent analyses suggest that while the Philippines does have a larger demographic dividend relative to its regional peers, it may not be that significant an economic driver, and the country’s only real advantage is that it has perhaps a bit more time than the rest of the region to prepare for the demands of an inevitable aged population.

The demographic dividend or “sweet spot” refers to the large proportion of the population that is under age 65 (according to the Philippine Statistics Authority) or under age 60 (the age used by most global databases). In the Philippines, as of now, about 33 percent of the population is under age 15, about 63 percent is of working age between 15 and 64 years old, and a bit less than 5 percent is over age 65, with the median age of the entire population being about 25 years.

The idea is that a large population of youth and working-age people will boost the economy due to their productivity and consumption. Addressing the Philippine Economy Society late last year, Socioeconomic Planning Secretary Arsenio Balisacan estimated that the demographic dividend will add 1 percent to annual gross domestic product (GDP) growth each year for the next 30 years.

That may be optimistic, according to some recent analyses, one published early last month by Moody’s Analytics, and one released just this week by the Asian Development Bank (ADB). In both, although the contribution of population growth — which necessarily lowers the median age of the population — is acknowledged, its impact on economic growth is downplayed to some extent, for several reasons.

First, even though rapid population growth has historically contributed a large part of annual GDP growth, it has been less meaningful than it may appear. Moody’s Analytics points out that during the period (up to the onset of the Covid-19 pandemic) when population growth was contributing about two-thirds of the Philippines’ economic growth, “the impact of population growth was flattered by the lightweight contributions” of total factor productivity and capital formation compared to other countries in the region.

This is also reflected in the comparatively low GDP per capita of the Philippines, $12,433 on a purchasing power parity basis as of the end of the third quarter of last year, the fourth-lowest in the Association of Southeast Asian Nations ahead of only Laos, Cambodia and Myanmar.

In addition, while the outside analyses do agree with Balisacan’s 1-percent estimate, the time frame in which that advantage can be enjoyed is much smaller than the government currently assumes. A society is defined as “aging” when the proportion of people ages 65 and older reaches 7 to 14 percent.

According to the ADB report, that is not going to happen in the Philippines in 30 years, but sometime in the next five years; by 2029, 10 percent of the population will be at least 65 years of age. The country is moving in that direction rather quickly; the current population growth rate of 1.5 percent is half what it was in 1960 and has been slowing at a rate of 0.06 percent per year over the past five years. At that rate, it will turn negative in 25 years.

What an “aging population” means in the context of the demographic dividend is that the boost to growth from a young and working-age population is going to be progressively smaller each year. Thus, instead of 1 percent per year as Secretary Balisacan estimated (actually 1.1 percent, according to Moody’s Analytics), the dividend may start there, but will be smaller in each subsequent year.

What this means for the Philippines is that, instead of sitting back and congratulating the country for being in the “demographic sweet spot,” policymakers should be working aggressively to use it to support future economic stability with an inevitably older population.

The ADB recommends a focus on expanding health care and social safety nets, access to pensions and retirement savings programs, and implementing support for older workers. If the country can do these things successfully, then the “youth dividend” can be transitioned into a “silver dividend,” and growth maintained for decades to come.